State Net Capitol Journal – May 20, 2013

Budget & Taxes

CA GOV DAMPENS BUDGET SURPLUS JUBILATION: A couple of weeks ago California officials announced the state was running a $4.5 billion surplus this fiscal year due to a surge in income tax collections in April. (See TAX REVENUE SURGE YIELDS SURPLUS IN CA in May 13 issue of SNCJ.) Coming after years of multi-billion deficits and painful spending cuts, the news had Democrats who control the state Legislature nearly dancing in the halls of the Capitol.

But those lawmakers were shaken from their reverie last week when Gov. Jerry Brown (D) released a revision to his January budget predicting the state would end the current year with only a $2.8 billion surplus - based on the assumption that the revenue surge now means the state will likely take in less later - and the state would actually finish next year with $1.8 billion less than projected in his previous budget.

What's more, the revised budget increases spending only for education, including $1 billion to implement math, English and other subject guidelines known as the Common Core Standards. Overall it actually scales the general fund spending plan from January down by $1.3 billion, to $96.4 billion, while creating a $1.1 billion cash reserve and holding the line on paying down the state's "Wall of Debt."

"This budget builds a solid foundation for California's future by investing in our schools, continuing to pay down our debts and establishing a prudent reserve," Brown said. "But California's fiscal stability will be short-lived unless we continue to exercise the discipline that got us out of the mess we inherited."

When Brown took office, the state faced $20 billion-plus annual budget deficits and $35 billion in debt. The governor's office said the state is now on track to lower that debt to $4.7 billion by 2017 - an 86-percent reduction - thanks to the billions of dollars in permanent cuts made in the 2011-12 and 2012-13 budgets as well as the temporary income and sales tax hikes (Proposition 30) approved by voters in November.

"We have climbed out of a hole with a Prop 30 tax," he said. "That's good. But this is not the time to break out the champagne."

That was the last thing many Democratic lawmakers wanted to hear. Even Senate leader Darrell Steinberg (D), one of Brown's strongest allies in the Legislature, said he was disappointed by the failure of the governor's revised plan to "begin making up for some of the damage done to tens of thousands of Californians."

But Brown vowed not to give in to pressure from fellow Democrats and interest groups to ratchet spending back up.

"Everybody wants to see more spending," he said. "That's what this place is, it's a big spending machine."

He added: "I'm the backstop at the end. And I'm going to keep this place in balance." (LOS ANGELES TIMES, SACRAMENTO BEE, CALIFORNIA GOVERNOR'S OFFICE, STATE NET)

LEGALIZED POT REVENUES MAY NOT MEET EXPECTATIONS: Voters in Colorado and Washington legalized marijuana for recreational use last year at least partly because of estimates that doing so could bring in as much as $2 billion in tax revenue over five years. But with some recent analysis poking holes in those projections, the states may not want to start spending that money just yet.

A widely cited study of Colorado's marijuana law by the Colorado Center on Law and Policy predicted that legalization and the state's 15 percent excise tax for school construction and 10 percent sales tax would generate $60 million in new revenue and savings annually until 2017. But a recent study by the Colorado Futures Center at Colorado State University indicated that the revenue boost from marijuana sales might not meet those expectations. The study found that in order for the 15 percent tax to raise the $40 million anticipated for schools, the cost to grow a pound of marijuana, given current consumption estimates, would have to be around $1,100 a pound, almost twice earlier estimates and potentially raising the price of retail marijuana so high that it could drive users back to the illegal market.

"Our overall conclusion was while there is some revenue here, this is not a panacea for fiscal imbalance going forward," said Phyllis Resnick, lead analyst for the study. "Our conclusion at the end was there is at least a risk, even with a high revenue number, once you take all this into account, there is not going to be a significant amount left over relative to the size of the [state's budget] gap," projected to be between $3 billion and $3.5 billion by 2025.

A government report in Washington predicted its marijuana law, which imposes taxes of 25 percent on producers, processors and retailers, could generate as much as $1.9 billion over five years, "assuming a fully functioning marijuana market."

But a major wrinkle in that projection is the fact that recreational pot sales is likely to be a cash-only business, potentially making it harder to collect sales taxes. The reason the business is likely to be cash-only is because, as with medical marijuana, no bank will knowingly approve or take deposits from credit card sales for the drug, since it's still illegal under federal law.

"I don't know how the state regulates or taxes an industry when it can't follow the money, said Don Childears, president of the Colorado Bankers Association.

The questions raised by Childears, the Colorado Futures Center and others spurred Jeffrey Miron, a Harvard economist and analyst for the libertarian Cato Institute to conclude: "Nobody has any idea [about legalized marijuana revenue]." (STATELINE.ORG)

SUPER STORM SANDY VICTIMS TAKE ANOTHER FINANCIAL HIT: Thousands of vacation home and business owners in coastal areas of New Jersey slammed by Hurricane Sandy last October are getting hit with big increases in their flood insurance premiums this year.

Richard Bandazian, who owns a vacation home on the Point Pleasant Beach boardwalk that was actually spared the storm's devastation, saw his insurance bill go up 25 percent to $4,700. And he was told it would keep going up by that amount every year until it reached an unspecified "full premium rate."

The reason for the rate spikes is that last year, before Sandy ever appeared on the radar, Congress passed two laws phasing out flood insurance subsidies the federal government began offering in the 1970s to get property owners and towns to join the federal flood insurance program, which is now deeply in debt.

Some members of New Jersey's Congressional delegation are now trying to convince their colleagues to reverse course on the issue to spare those still trying to recover from Sandy.

"It's a triple whammy," said Sen. Bob Menendez (D-New Jersey). "Even as we slowly recover from the worst natural disaster in our state's history, a man-made disaster is looming in the distance, jeopardizing our recovery. Those who cannot afford the higher premiums will be either forced to sell or abandon their homes."

New Jersey Gov. Chris Christie (R), likewise, has appealed to Washington for relief.

"Foisting the additional burden of a flood insurance increase on home and business owners as currently proposed would be financially devastating," he stated in a letter to Senate Majority Leader Harry Reid (D-Nevada) and House Speaker John Boehner (R-Ohio).

But Christie and Menendez face opposition from free-market conservatives and some environmentalists who contend that flood insurance rates should be higher to discourage developers from building in coastal areas.

Bandazian, meanwhile, points out a flaw in one of the arguments behind the insurance subsidy phase-out: that millionaires ought to shoulder more of the burden of insuring their beach houses.

"They're saying only rich people are able to have houses at the Jersey Shore," he said. "I worked a lifetime to get my beach house, and I'm not a rich guy." (NORTHJERSEY.COM)

BUDGETS IN BRIEF: A three-judge panel in NEW JERSEY has temporarily blocked Gov. Chris Christie's (R) plan to seize $140 million dedicated to local affordable housing to help balance the state budget. Towns and housing advocates have said that plan could delay the construction of more than 3,000 homes for low-income and disabled residents (NORTHJERSEY.COM). • ARIZONA Gov. Jan Brewer (R) vowed last week to veto any bills sent to her until she sees progress from lawmakers on a new state budget and Medicaid expansion. The state Legislature headed into its 120th day last week without significant movement on either issue (EAST VALLEY TRIBUNE, STATE NET). • SOUTH CAROLINA lawmakers are considering legislation that would levy a tax on e-cigarettes on top of the state sales tax. The bill (HB 4074) is modeled after legislation in OKLAHOMA that has been passed by the state's Senate but not the House, which would impose a tax of five cents per milliliter of vapor liquid in an e-cigarette and assess a five-cents-per-ounce tax on "tobacco-derived" products (STATE, STATE NET).

- Compiled by KOREY CLARK

SNCJ Spotlight - States can only watch as Congress tackles major issues that impact them: Supporters of federal action to allow states to require Internet retailers to collect sales tax on online purchases got a huge boost on May 6 when the U.S. Senate overwhelmingly endorsed legislation to make that a reality.

In a statement, National Conference of State Legislatures Executive Director William Pound lauded the Senate for listening "to their state legislators, mayors, governors and other state and local officials," noting that states have been urging Congress to pass such a bill for over a decade. The National Governors Association also chimed in with kudos, calling the bill "common-sense legislation that upholds the principles of federalism and levels the playing field between Main Street and e-street."

Both also expressed optimism that U.S. SB 743, also known as the Marketplace Fairness Act, will eventually make its way to the President Barack Obama's desk. But doing that means getting through what many observers expect to be much tougher going in the House of Representatives.

The battle over collecting sales tax on out-of-state purchases has actually been raging since the 1960s. It was all mostly catalogue sales then, the Internet still decades away from reality. (See "With Congress stalled, states work their own 'Amazon tax' deals" in the May 7, 2012 issue of SNCJ) Even then, however, consumers in all but the five states without a sales tax were supposed to keep track of their purchases and, for any one in which they were not charged the levy, to calculate what they would have owed and submit that payment to their own state. It is a good practice in theory, but one that in reality most people virtually ignore.

States have long acknowledged the difficulty in getting people to pay, thus leading to the push to have the retailers do it at the time of the sale. Most have resisted, arguing that the maze of state and local tax laws and jurisdictions were too cumbersome and costly for them to maneuver. Arguments by states to force retailers to collect have twice made it to the U.S. Supreme Court, with the justices each time citing the U.S. Constitution's Commerce Clause in ruling that states have no legal power to compel retailers without a "nexus," or a bricks-and-mortar presence, in their state to collect sales taxes.

The explosion of e-commerce - it now accounts for almost 8 percent of all U.S. retail sales - has moved many states to try again. At stake is about $11 billion in estimated annual lost tax Internet sales tax revenue, according to one study conducted by researchers at the University of Tennessee. The National Conference of State Legislatures places the total figure, including catalogues and business-to-business sales, at over $23 billion (see Bird's eye view).

Even so, legislation in Congress has gone nowhere for years, forcing states to begin adopting their own statutes, although some laws have later been rejected by the courts. In recent years, nine states have also worked out deals with online retail giant Amazon in which the company collects tax on sales in those states in exchange for their support in lobbying Congress to adopt a nationwide bill. These states include California, Massachusetts, Texas and Tennessee.

Since 2000, almost two dozen states have also signed on to the Streamlined Sales Tax and Use Agreement (SSTUA), a joint venture put together by the NGA and NCSL to get states to streamline their tax codes to make it easier for remote sellers to collect sales levies. With all that state activity, federal action seemed inevitable.

But while SB 743 sailed through the Senate with bipartisan support - and without as much as a committee hearing - there is no guarantee it will do so in the House. The measure still has strong opposition from Internet retailers like eBay.com and Overstock.com, who believe it will do far more harm than good, as well as some House Republicans who contend it constitutes a new tax on consumers. Supporters refute that, saying it only requires online retailers to collect the tax on purchases made from states which have a sales tax, the same tax the consumer would pay if they were to buy a product at a retail store.

Even so, House Speaker John Boehner (R-Ohio) made it clear he was not sold, telling Bloomberg Television that he would "probably not" support the bill, but he has sent it off to the House Judiciary Committee to "see what they think."

Committee Chairman Bob Goodlatte (R-Virginia) has expressed concern over the bill, but in a statement said he wanted to see it have "more uniformity" to ensure small online retailers would not "be forced to wade through potentially hundreds of tax rates and a host of different tax codes and definitions."

Supporters counter that the bill also attempts to ease the burden on small online retailers, exempting those with sales of less than $1 million annually. States that do participate must also simplify their tax processes (22 states have already started under the SSTUA), create a separate entity specifically for remote sales tax collection and provide remote sellers with free tax software.

Bird's eye view - Some states losing billions in uncollected internet sales taxes:

Collectively states missed out on an estimated $23.3 billion in sales taxes from online and catalog purchases last year, according to the National Conference of State Legislatures. California was the biggest loser by far, forgoing nearly $4.2 billion, by NCSL's calculations. No. 2 state Texas' loss was about $1.8 billion. The states that lost the least were the five without a sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.

- Compiled by RICH EHISEN

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